Question

1. The concept of elasticity for demand is important for determining the prices of various factors of production. Discuss the various factors that influence the price elasticity of demand - 20 Marks

The above question contains 20 marks. As per University guidelines, the answer should be a min of 800 Words. Pls do accordingly

Answer 1

1. As The concept of elasticity of demand is important for determining the prices of various fatore of production. The various factors that influence the price elasticity of demand are discussed below-

1) Nature of Commodity: The elaticity of demand for a product varies according to the nature of the commodity. A commodity may be a necessary or luxury good for some people. When a commodity is a necessity like the basic needs such as foodgrains, vegetables etc., its demand is generally inelastic or less elastic, i.e. its demand does not fluctuate much with change in price. On the other hand, if the commodity is a luxury such as a television, refrigerator etc., its demand is highly elastic, i.e. its demand is highly fluctuating with change in price.

2. Availability of substitues: Elasticity of demand for a commodity with a large number of substitutes is relatively elastic. The reason behind this is taht even a small rise in its price can induc the consumers to shift to its substitutes. for example, a rise in the price of pepsi encourages teh consumers to shift to Coke and vice -versa. On the other hand commodities with few or no substitues have less elastic demand or inelastic demand. for example Salt is a commodity with no substitue, so elaticity of demand for salt is inelastic.

3. Income level: In comparison to low income group, elasticity of demand for any commodity for high income group is less. This is due to the fact that high income people are not influenced much by the changes in price of a commodity. But, poor people are highly affected by the changes in price of goods. So, the elasticity of demand for any good is very high for low income group.

4. Level of price: the elasticity of demand is also affected by the level of price of a commodity. expensive goods like Mobile phones, laptopos, refrigerators etc have highly elastic demand as their demand is very sensitive to the changes in prices. However, cheap goods like matchbox, cigrette, pencil etc. have less elastic demand because changes in the price of these commodities do not affect tehir demand by a considerable amount.

5. postponement of consumption: Commodities whose demand is not urgent, have highly elastic demand as their consumption can be postponed in case of an increase in their prices. However commodities which have urgent demand, have inelastic demand because of their urgent requirement.

6. Number of uses: Commoditie with a large number of uses have a highly elastic demand. when price of such a commodity increases, then it is generally put to more urgent uses and, as result its demand false. when the prices fall, hen it is used for satisfying even less urgent needs and demand rises. For example, electricity is a multiple use commodity. fall in its price will result in substantial increase in its demand. On the other hand, a commodity wwith few or no alternative uses has less elastic demand.

7. Share in total expenditure: Proportion of a consumer's income that is spent on a particular commodity also influences the elasticity of demand for it. Greater the proportion of income spent on the commosity, more is the elasticty of demand for it, and vice versa. Demad for goods like soap, salt, match box etc tends to be inelastic as consumers spend a small proportion of their income on such goods. when prices of such goods change, consumers coninue to purchase slmost the same quantity of the goods. however if the proportion of income spent on goods is very high, they tend to have an elastic demand.

8. Time period: elasticity of demand is related to time period. deman is generally inelastic in the short period. It is because consumers find it difficult to change their habits in a short amount of time. on the other hand demand is elastic in the long run because it is comparatively easier to shift to other substitues in the long run when price changes.

9. Habits: Commodities which have become habitual necessities for the consumers, have less elastic demand. It is because such a commodity becomes a necessity for the consumer and he continue to purchase it even if its price rises. for example Alcohol, tobacco, cigerattes etc.

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